Subprime Lending You See Evil ?

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Again in 1950 in Columbus, Ga., a young nurse working double shifts to support her three children and disabled husband managed to buy a modest house on a street called Dogwood Avenue.
Phil gramme, former United States senator, often told the story that his mother acquired his childhood home. Considered something of a risk, took a mortgage with relatively high interest rates which he likened today’s subprime loans.
A fierce opponent of government intervention in the market, Mr. gramme, a Republican from Texas, recalled during a 2001 episode of Senate debate on a measure to reduce predatory lending. What some view as exploitive, he claimed, others see it as a gift.
“Some people look at subprime lending and see evil. I look at subprime lending and we see the American dream in action,” he said. “My mother lived it as a result of a finance company to make a mortgage loan that a bank would.”
On Capitol Hill, Mr. gramme has become the most effective proponent of liberalization in a generation, with its expertise (a Ph.D. in economics), free-market ideology, get into the Senate banking committee and force of personality (a writer in Texas, once called him “a snapping turtle”). And in one remarkable stretch from 1999 to 2001, he has pushed legislation and promoted policies that he says unshackled business from unnecessary restrictions, but critics charge contributed significantly to the financial crisis that has scared the nation.

He led the effort to block the measures curtailing deceptive or predatory lending, which was just beginning to result in a jump in home Foreclosures that would undermine the financial markets. He advanced legislation that has fractured oversight on Wall Street knock down while Depression-era barriers that restricted the rise and reach of financial conglomerates.

And he pushed through a provision that virtually ensured the regulation of complex financial instruments known as derivatives, including swaps of credit, contracts that encourage risky investment practices at Wall Street the most venerable institutions and the spread of risks as a virus, around the world.

Many of deregulation efforts have been supported by the Clinton administration. Other members of Congress - who collectively received hundreds of millions of dollars in campaign contributions from donors the financial industry in the last ten years - also played roles.

Many lawmakers, for example, insisted that Fannie Mae and Freddie Mac, the nation’s largest mortgage finance companies, to take on risky mortgages in an effort to aid poor families. More Republicans resisted efforts to address lending abuses. And failed to address congressional committees early symptoms of the disease Friday.

But before he left Capitol Hill in 2002 to work as an investment banker and lobbyist for UBS, a Swiss bank, which was hard hit by the downturn of the market, was Mr. gramme, which was the most effective in the fight against government intervention in several markets.

“Phil gramme was great spokesman and leader of the opinion that market forces should lead, not the economy regulations,” said James D. Cox, a corporate law scholar at Duke University. “The movement that helped contributed mightily to lead our problems.”

In two recent interviews, Mr. gramme described the current turmoil as “an incredible trauma,” but said he was proud of his record.

He blamed others for a crisis: Democrats who dropped barriers to capital in order to promote homeownership, once he called “predatory borrowers” who took mortgages they could not permits; banks that took on too much risk, large financial institutions and that he did - set aside is not enough capital to cover their bad bets.

But looser regulatory played virtually no role, he asserted, saying that it is simply a myth emerging.

“There is this idea afloat that, if you had more regulations should be fewer mistakes,” he said. “I see no evidence in our history or anyone else is a fundamental o.” He added: “The markets worked better than might be thought.”

Common wisdom rejection

Mr. gramme can see that with a buddy, long have argued that economic events are misunderstood.

Before entering politics in the 1970s, he taught at Texas A & M University. He studied the Great Depression, producing research to reject the conventional wisdom that suicides increased after he collapsed on the market. He examined the financial panics of the 19th century, concluding that policy makers and economists misread events had repeatedly to justify a draft regulation.

“There is always a revisionist history that tries to pretend that the system has failed and you have to do is to run the government have things,” he said.

Since the beginning of his career in Washington, Mr. gramme aggressively promoted the ideology of free-market conservative and beliefs. (He was so insistent on having his way that one House speaker joked that if Mr. gramme have been around since Moses brought the Ten Commandments down from Mount Sinai, from Texas would have replaced his own.)

He could be devoid of wisdom. Over the years, he urged that the food stamp cut, because “all our poor people are fat,” said that it was difficult for him “to be sorry” for Social Security recipients and, as the economy soured summer Last, called America “a nation of whiners.”

His economic views - on the seat and the Senate banking committee - not him quickly in support of the nation’s major financial institutions. From 1989 to 2002, federal records show, was the top recipient of campaign contributions from commercial banks in the top five for donations from Wall Street. He and his staff came often to industry-sponsored speaking events in the country.

From 1999 to 2001, Congress considered the first steps to stop predatory loans - usually those who had high taxes, penalties and prepayment significant explosion monthly payments and often were made to borrowers with incomes small. Foreclosures on such loans have been rising, setting off a wave of personal bankruptcies.

But Mr gramme did everything he could to block the measure. In 2000, he refused to have their banking committee, taking into account the proposals, welcomed the intervention of the National Association of Mortgage Brokers as a “very big, very big step for us.”

A year later, he objected again when the Democrats tried to stop creditors from being able to pursue claims in bankruptcy court against borrowers who default on loans taken by prey.

While acknowledging some abuses, Mr. gramme argued that the measure would lead thousands of creditors with the reputation of the housing market. And he told fellow senators the story of his mother and a mortgage.

“What incredible service,” he said sarcastically. “As a result of the loan which, at a premium of 50 percent, so far as I am aware, this was the first person in her family, from Adam and Eve, ever at her own home.”

Again, he succeeded in putting the consideration of restrictions on lending. His opposition, says furious consumption. “He would not listen to reason,” said Margot Saunders of the National Center for Consumer Law. “He would not allow himself to be convinced that free markets should not be working.”

Speaking at a banking conference that Monday, said Mr gramme problem of predatory lending has not been made to banks. Instead, he faulted “predatory borrowers.” The American Banker, a trade publication later reported that he was greeted “like a conquering hero.”

At the altar of Wall Street

Mr. gramme would sometimes talk with reverence about the nation’s financial markets, trade and business to do that in butter fortune.

“When I am on Wall Street and I realized that this is very nerve center of American capitalism, and I realized what made capitalism work for the people of America, to me this holy place,” said him at a Senate hearing in April 2000, after a visit to New York.

That point of view - and concerns that Wall Street dominance has been threatened by global competition and exceeded regulations - in the form of its agenda.

At the end of 1999, Mr. gramme has played a central role in what would be the most important financial laws, from depression. Gramme of-Leach-Bliley Act, as the measure was called, removed barriers between commercial and investment banks that was established to reduce the risk of economic disaster. A long sought by industry, the law would give commercial banks, securities firms and insurance companies become financial supermarkets that offer a range of services.

The measure, which Mr. gramme helped write and move through the Senate, also shared the supervision of conglomerates among government agencies. Securities and Exchange Commission, for example, would oversee the brokerage arm of a company. Bank regulators would oversee the operation of his bank. State insurance commissioner would examine the insurance business. But no single agency would have authority over the entire society.

“No attention was given to how these regulations would interact with one another,” said Prof. Cox of Duke. “Nobody was looking at the holes in regulatory structure.”

The arrangement was a compromise necessary to get the law adopted. When the law was signed in November 1999, he proudly declared “a deregulatory bill,” and added, “I learned the government is not the answer.”

In the final days of the Clinton administration, a year later, Mr. gramme celebrated another triumph. Determined to close the door on any future regulation of emerging markets for derivatives and swaps, he helped pushed through legislation that achieved this objective.

Designed to help companies and investors to limit risk, swaps which are usually contracts of employment as a form of insurance. A bank concerned about increases in interest rates, for example, can buy a tool of derivative financial instruments that would protect it from rate swings. Credit-default swaps, a type of derivative, could protect the holder of a mortgage security against a possible default.

Laws have left earlier regulatory issue sufficiently ambiguous, worrying Wall Street, the Clinton administration and lawmakers of both parties, who have argued that too many restrictions would hurt business and financial spur economic agents to take their business overseas. And while merchandise Futures Trading Commission - under the leadership of Mr gramme’s wife, Wendy - approved the rules in 1989 and 1993 exemption swaps and derivatives from some regulation has not yet been concern that there was not enough.

After Mrs. gramme left the Commission in 1993, several lawmakers proposed regulations thereof. Spread risk, they and other critics believe that such contracts are in the cascade system prone to failure. Their proposals, though, went nowhere.

But late in the Clinton administration, Brooksley E. Born, who took over the body of Mrs. gramme led once again raised the issue. A suggestion to government regulators alarmed the markets and drew fierce opposition.

In November 1999, senior Clinton administration officials, including Treasury Secretary Lawrence H. Summers, joined by Federal Reserve chairman, Alan Greenspan, and Arthur LEVITT Jr., head of the Securities and Exchange Commission, issued a report which recommended the legislation in Instead of exempting many types of financial instruments derived from federal oversight.

Mr. gramme helped lead the charge in Congress. Demanding more regulatory freedom in the financial industry has requested, he persuaded colleagues and senior officials negotiated with the administration insisted so hard, almost scuttled the deal. “When you get in the red zone, I want to score,” said Mr. gramme reporters from time.

Eventually, he had extracted enough. In December 2000, the commodity Futures Modernization Act was adopted as part of a larger bill by unanimous consent after Mr. gramme dominated the Senate debate.

“This is important for the legislation in every American investor,” he said at the time. “It will keep our modern markets, efficient and innovative, and it guarantees that the United States will maintain global dominance of financial markets.”

But some critics worried that the lack of oversight could allow abuses that could threaten the economy.

Frank Partnoy, a law professor at the University of San Diego and an expert on derivatives, said, “No one, including regulators, could get an accurate picture of this market. The consequences of that is that he left dark for the last eight years. “And, he added,” Bad things happen when it is dark. ”

In 2002, Mr. gramme left Congress, joining UBS as an investment banker and senior head of the company’s lobby.

But he would not surrender to Washington.

Lobby outside

Soon, it was help convince lawmakers to block Congressional Democrats’ efforts to combat predatory lending. He arranged meetings with directors and top Washington officials. He turned over $ 1 million political action committee has been a aide to make donations to like-minded lawmakers.

Mr. gramme, now 66, who declined to discuss his compensation from UBS, has chosen an appropriate time to go to Wall Street. Major financial institutions, including UBS, have been growing, partly as a result of the gramme-Leach-Bliley Act.

Increasingly, institutions were trading derivative instruments that Mr. gramme helped escape control regulations. UBS has been collecting hundreds of millions of dollars in credit-default swaps. (Mr. gramme said he was not involved in this activity at the bank.) In 2001, a year after the passage of goods law, the derivatives market on the insured value of $ 900 billion of credit last year, the number hadswelled $ 62 trillion.

But as housing began to decrease prices last year, foreclosure rates began to rise, especially in regions that have been heavy use of subprime loans. That set off a catastrophic chain of events. Weak housing markets would create strains that would ultimately financial institutions in the world on the edge of collapse.

UBS was among them. The Bank said nearly 50 billion $ in credit losses and write-downs at the beginning of last year, making a bailout of up to 60 billion $ by the Swiss government.

As Mr. gramme made in Congress has come under attack the middle of all the turmoil, some of his colleagues were to come defense.

“He is a true dyed-in-the-wool free-market guy. He is very much a purist, an idealist, he has a set of principles and he has never abandoned,” said Peter G. Fitzgerald, a and former Republican senator from Illinois. “This notion of guilt by economic collapse Phil gramme is absurd to me.”

But Michael D. Donovan, a former S.E.C. lawyer, Mr. gramme faulted for his insistence on deregulating the derivatives market.

“He was the architect, lawyer and the best person in Congress on these issues,” Mr. Donovan said. “For me, Phil gramme is the single most important reason for the current financial crisis.”

Mr. gramme, a professor of economics ever, disputes his critics’ analysis of the causes of the upheaval. He argues that swaps, which allow companies to ensure against defaults, have decreased, not increased, the effects of declining housing markets.

“This is a part of the myth of deregulation,” he said in the interview. “By and large, credit default swaps were distributed risk. They have not created. The only reason people have focused on is that politicians do not know a credit-default swap from a turnip.”

But not many experts agree, including some of Mr. gramme was allies in Congress. They say the lack of oversight leaves the system vulnerable.

“The virtually unregulated by the credit-default swaps has played a significant role in a credit crisis, including the now 167 billion to $ taxpayer rescue of AIG,” Christopher Cox, chairman of the SEC and a former congressman, said Friday.

Mr. gramme say that, given what happened, are modest regulatory changes he would favor, including requiring issuers of credit-default swaps to demonstrate that they have sufficient capital to back up their pledges. But his belief that government should intervene in markets minimum is indestructible.

“They say that there has been 15 years of massive deregulation and that’s what caused the problem,” Lord said his critics gramme. “I just do not see any evidence of it.”

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